Why factoring industry needs fintechs
Fintechs are to factoring companies what bars are to high jumpers
Fintechs are to factoring companies what bars are to high jumpers.
Until recently, the micro segment was taken by banks and factors with a pinch of salt. The procedure of granting factoring or credit limits was just as complicated as in the case of the SME or corporate segments. Only few opportunities for cross-selling. Lots of hassle, little income.
But then came the COVID-19 pandemic. At first, banks were still granting limits in a few weeks, even though fintechs were doing it in seconds, and online. Over time, in order not to lose micro customers en masse, bankers began to get ready to “leap up”. In other words: to raise the standard of their services.
The benefits here are clear. By providing access to bank financial products at the very beginning of a company’s operation, the bank will be able to retain a customer more effectively. Such a customer will appreciate the fact that when their company was not yet big, the bank believed in it and provided it with opportunities for growth.
But won’t this customer later flee to any given fintech? There is no such risk. In most cases, fintechs allow companies to spread their wings when banks don’t. However, once the customer has generated enough revenue, they move on to banks, which, despite their inconveniences, are simply much cheaper.
Why? Banks get their funding largely from depositors, who hold funds in them on deposits. The funds from these deposits are lent to other financial market participants, in this case, borrowers. Given the record low interest rates, loans are cheap, but the bank must ensure that the borrowed funds return to the depositor – hence the much more complicated procedures for granting funding. Fintechs, on the other hand, are backed by external investors who are able to bear greater risk in case the loan is not repaid – but for this risk, they expect a much higher return. Bank financing, for example, is a few percent per annum; in the case of fintechs, that interest rate can be as high as 30%.
Additionally, banks provide a wider range of financial products than fintechs: credit cards, bank guarantees, currency exchange, or letters of credit. At a certain stage of the company’s operation, more products will be needed for further development, and here the offer of fintechs is limited.
Market players providing software for financial institutions, who are able to adapt their software both to banks and for fintechs, may benefit from the whole situation. Contrary to appearances, banks and fintechs have completely different requirements. While fintechs need online solutions, fast processes and emphasis on the comfort of use, banks and factors need to pay more attention to procedures such as know your customer (KYC), or customer scoring.
And because the user experience cannot be ignored these days, fintechs are a good complement to financial institutions and set the direction for them. It is thanks to fintechs that banks rise to a higher level.
factoring product manager,
Comarch
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